Tuesday, June 1, 2010 2 comments ++[ CLICK TO COMMENT ]++

Bank of Canada raises interest rates to 0.5%

From The Globe & Mail:

The Bank of Canada Governor became the first central banker in the Group of Seven to raise borrowing costs since the financial crisis and recession, increasing the benchmark overnight rate Tuesday by one-quarter of a percentage point to a still exceptionally low 0.5 per cent.

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By comparison, Canada’s benchmark rate now matches that of Britain and is only half as much as the European Central Bank’s 1 per cent, so there’s a lot of ground to cover before borrowing costs are at a level economists consider “neutral.” At the same time, even the Reserve Bank of Australia, which started tightening last fall, kept its benchmark rate at 4.5 per cent this week. It, too, cited “various factors” in the world economy that “need to remain under review,” among other things.

Although Canada is doing fairly well, it's still a gutsy move by the central bank. It looks a bit premature to me but I might be biased due to my overly bearish views.

On another note, I was thinking today about the possibility of a recession without an inverted yield curve? Typically an inverted yield curve precedes a recession but given the talk by some of a double-dip recession, I wonder how likely it is without an inverted yield curve.

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2 Response to Bank of Canada raises interest rates to 0.5%

Parker Bohn
June 12, 2010 at 11:42 AM

I just ran across this from 2008:

http://krugman.blogs.nytimes.com/2008/12/27/the-yield-curve-wonkish/

Krugman makes a pretty convincing argument about exactly how much a positive yield curve can tell us when short term yields are very low.

Sivaram Velauthapillai
June 12, 2010 at 10:19 PM

I haven't been reading Krugman regularly lately but I did read that article a while ago. I was actually wondering recently whether the economy will slow down without an inverted yield curve (I was looking at the early 80's when we had two recessions close to each other.) Some of Krugman's thought sort of touch on this, although it will be interesting to see if short-term rates will rise above the long-term one over the next 2 years (chances of it happening in USA are slim but I'm thinking more about other countries where short-rates are rising.)

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